Subsidize jobs to help the jobless

January 15, 2014

Today's editorial cartoon might be a form of reductio ad absurdum - countering a claim by taking it to absurd lengths - yet the premise prompts useful debate.

What this argument in favor of extending unemployment benefits overlooks is every dollar given to someone who is jobless ostensibly comes from a taxpayer who has a job. (Sure, the federal government add that dollar to the deficit, but the national debt eventually will cost taxpayers dollars.)

First, the figure used in the cartoon often is attributed to calculations by Mark Zandi, chief economist at Moody's Analytics. The theory is when the government gives a jobless person money, that person can use it to shop for necessities. A store owner, in turn, uses it to restock the shelves, and it continues to ripple through the economy. That is the fiscal multiplier.

The Congressional Budget Office uses his approach to predicting the economic impact of government spending. For example, in November 2011, a CBO update said a dollar in unemployment aid would increase the gross domestic product between $0.40 to $1.90.

Tax cuts typically are forecast to have a lesser economic impact because it's assumed taxpayers might save some of that extra cash in the bank or use it to pay down debt. That would reduce the fiscal multiplier, at least in the near term.

Of course, Congress could cut spending elsewhere by the amount needed to extend jobless benefits. Taxpayers wouldn't foot the bill. Plus, people receiving unemployment likely spend more frugally than government bureaucrats.

But a better approach might be a targeted tax cut.

According to information Zandi gave to the Senate Finance Committee in April 2010, a job tax credit would result in $1.30 of economic growth for every $1 employers saved on their taxes.

We argue the money needed to extend unemployment benefits would be more effective if used to offset a job-creation tax credit. That could boost the economy by putting people to work, increasing economic output and creating even more jobs indirectly.

Remember, when the government subsidizes something, it tends to get more of it.